What Are State-Sponsored Retirement Plans?

What Are State-Sponsored Retirement Plans?
13
min read
November 23, 2022

Fewer Americans are saving for retirement these days. According to the National Institute on Retirement Security, the average working household has only $2,500 saved for retirement.

And when you look at households nearing retirement, the number is even bleaker. A full 62% of working families headed up by someone in the 55 to 64 age bracket have less than one year’s salary tucked away—far from enough to maintain their standard of living at retirement. 

To combat this crisis, a handful of states have implemented their own retirement plans. It gives workers who don't have access to an employer-sponsored one an option to save for the future.

Here's what you need to know about these state-sponsored plans.

What Are State-Sponsored Retirement Savings Plans? 

State-sponsored plans are, as the name implies, retirement plans created and administered by state governments. They're also sometimes called state-run retirement programs. And though they sound similar, these retirement plans aren’t for state employees or a part of the Civil Service Retirement Service

Instead, these plans are mainly designed for low- to moderate-income earners who work for small or medium-sized businesses. 

The details of each state’s laws on these plans can vary, but they all share one common goal: to help workers save for retirement so they can live out their golden years with dignity. 

You'll need to look at your location to get the specific details on how these plans work where you live. But to get you started with your research, we’ll dive into where these retirement programs are mandated and give you a big-picture view of how they typically work. 

Which States Have Mandatory Retirement Plans?

Currently, only five states mandate retirement plans: 

Eligible employers in these states have to register for the state-sponsored retirement plan or seek an exemption to avoid being penalized.

But how common are these state-sponsored plans? Very. All states except for Alabama, Alaska, South Dakota, and Florida have at least considered legislation on this topic. With so many states exploring the options, it’s likely that more of them will implement similar programs someday. 

But please keep in mind that if you already offer different retirement options for your employees, you’ll likely qualify for an exemption from participating in the state program. However, you may still need to take action to notify the officials that you’re exempt. 

Mandatory State-Sponsored Retirement Plans
State Name of Retirement Plan Who Needs to Comply? Penalties
California CalSavers Companies with over five employees Penalties of $250 per eligible employee at first, with the fee increasing to $500 per eligible employee if your company isn’t registered after 180 days
Connecticut MyCTSavings Companies with over five employees Employers that don’t register may face fines, but how much isn’t disclosed. The website states, “if a business falls out of compliance and fails to register, an investigation could occur and there may be penalties.”
Illinois Illinois Secure Choice Companies with over five employees that have been in business for at least two years Penalties of $250 per eligible employee for the first calendar year, and $500 per eligible employee for additional years out of compliance
Maryland Maryland Small Business Retirement Savings Program Companies with at least one W2 employee, two years in business, and an automated payroll system No penalties are listed, but participating employers can waive the $300 Maryland business annual filing fee
Oregon OregonSaves Currently, companies with over five employees, though in 2023, businesses with 1-4 employees Employers that don’t register may face fines, but the details aren’t disclosed. The website states, “Employers that are out of compliance may be subject to enforcement action, including penalties and fines.”

States with Voluntary State-Sponsored Retirement Plans

Two states, Massachusetts and Washington, have created state-sponsored retirement options, but do not currently mandate employer participation. Here’s a bit more information about these plans. 

Voluntary State-Sponsored Retirement Plans
State Name Of Retirement Plan Who The Plan Is Designed For
Massachusetts Massachusetts Defined Contribution CORE Plan Registered non-profit corporations with 20 or fewer employees
Washington Washington Small Business Retirement Marketplace A retirement marketplace where both businesses and individuals can find suitable plans

States with Future State-Sponsored Retirement Plans

In addition, seven states have passed legislation about government-run retirement plans and are still working out the requirements: 

  • Colorado
  • Maine
  • New Jersey
  • New Mexico
  • New York
  • Virginia
  • Vermont

Most of these plans aren’t yet active. In some cases, businesses don’t have to sign up for the program for another year or two, or even longer. In others, it’ll be an optional program. 

If you run a business in one of these states, here’s the latest information about the retirement plans. 

Future State-Sponsored Retirement Plans
State Name of Retirement Plan Target Implementation Date Mandatory Participation?
Colorado Colorado Secure Savings Program Early 2023 Yes, for companies with over five employees that have been in business for at least two years
Maine Maine Retirement Savings Program April 2023 for companies with 25 or more employees;
October 2023 for companies with 15-24 employees;
April 2024 for companies with 5-14 employees
Yes, once fully implemented, for companies with over five employees.
New Jersey New Jersey Secure Choice Savings Plan To be determined—the board meets again in mid-November 2022 Yes, once implemented, for companies with over 25 employees that have been in business for at least two years
New Mexico New Mexico Work and Save Act July 1, 2024 No, it’s a voluntary program for employees and employers
New York New York Secure Choice Savings Program To be determined—the legislation specifies enrollment was to begin Dec. 31, 2021, but there was also a provision for the board to delay the implementation an additional 12 months if necessary. No further updates have been provided. Yes, for companies with 10+ employees
*New York City Savings Access New York Retirement Program Board has up until August 9, 2023 to implement the program. But NYC’s program will be discontinued if the state passes a similar program. Yes, for companies with 5+ employees
*Seattle, Washington Seattle Retirement Savings Plan Original target deadline was Jan. 1, 2021, but implementation was delayed due to similar laws pending by Washington state. Laws won’t go into effect if the state passes a similar program. Yes, for companies that don’t offer retirement options
Virginia Virginia Saves July 1, 2023 Yes, all eligible employers must enroll once implemented. This includes self-employed individuals, sole proprietors, and companies with five or more employees.
Vermont Green Mountain Secure Retirement Plan To be determined—the original plan was for 2019. Then, the state’s Treasurer’s office announced it was aiming for a 2021 launch. No further updates have been released since then. No, voluntary for employers with 50 or fewer employees

*Cities where implementation of retirement plans depends on pending state laws on the same issue. 

States that have Laws on Retirement Plans, but no Implementation Date

Hawaii and Delaware have also passed legislation, but are still working out the details of their plans. As of now, they don’t have a target enforcement date. Here’s where you can learn more:

States with No Implementation Date
State Passed Legislation
Hawaii Hawaii Retirement Savings Board
Delaware DE EARNS

How Do State-Sponsored Retirement Plans Work? 

Most of these plans share some common features. Here's a quick look at how they typically work.

  • They’re most often designed for private sector employees.
  • Workers are automatically enrolled and have the same amount saved per month, but each employee can adjust their contributions (up or down) as they see fit.
  • Employers are usually not allowed to put money into the plans, so there are no employer contributions or matches.
  • Employee contributions go from payroll directly to the plan.
  • They take fiduciary responsibility off of the employer, so the company isn’t responsible for investment decisions.
  • They’re designed to be easy to administer. 
  • Workers are typically able to take their state-sponsored retirement savings with them if they change jobs.
  • In states mandating retirement plans, employers are required to either offer an employer-sponsored retirement plan for workers or automatically enroll them in the state-sponsored one.

What Is the Difference Between State Retirement and a 401K?

The most common type of state-sponsored plan is a Roth IRA (Individual Retirement Account). With this type of account, employees pay into their account using their take-home pay, i.e. money they’ve already paid taxes on. This means that when they take money from their retirement account in the future, they don’t have to pay taxes on those distributions. 

Traditional IRAs and 401(k)s, on the other hand, are funded with pre-tax dollars. This is money that gets taken out of their gross pay, i.e., before taxes like FICA and other payroll taxes are taken into account. While this saves money on taxes in the short-term, it means that employees have to pay taxes when they withdraw money from their account after retirement. 

There are two states (Washington and New Mexico) that instead created a Retirement Marketplace for businesses and individuals. These state-run marketplaces offer a selection of private retirement plans from various providers, including traditional IRAs, Roth IRAs, Solo 401(k), and more. People can compare plans and pick the one they want. 

But Do They Actually Work?

Providing employees with a way to save for retirement is a good thing. But, the results aren’t yet conclusive about whether or not these state-mandated funds are the best solution. 

A recent study from the National Bureau of Economic Research found that of the 67,000 participants in the OregonSaves program detailed below, the average account balance was only $754. While employees are saving, this balance isn’t enough to make a meaningful difference in their retirement years. 

The same study found that multiple workers were opting out of the program. The researchers learned that nearly a third of people who decided not to save simply couldn’t meet their current financial obligations, so had no extra money to tuck away for retirement. 

Many employees who opted out also indicated that they had no plans to ever retire, or they planned on living on social security when that time came.

So while these plans do seem to encourage savings for some employees, more education on how to save on a low income may be needed before they can make an impact.

Do You Have to Enroll in a State-Sponsored Retirement Program? 

Probably not! You can likely avoid having to sign up for your state’s plan by providing an employer-sponsored retirement plan. That's when you, as the employer, take on the responsibility of offering and managing retirement savings accounts for your employees.


But if you go that route, don’t forget to apply for an exemption with your state’s plan to avoid penalties. Your state’s plan website linked above should have a step-by-step guide to do this. If not, it’ll list someone at the state you can contact for help. 

You’ll want to contact the state right away, and provide all information that’s required, as missing deadlines can lead to fines. 

Is a State-Sponsored Plan Right for Your Business? 

Deciding between a state-sponsored plan and an employer-sponsored one is an important decision for any business owner. 

Ultimately, it depends on you and your goals. For some companies, offering a different IRS-qualified retirement plan makes the most sense. But, for those that aren’t ready to take this step, state-sponsored programs can be the best way to adhere to the new laws. 

You’ll need to carefully review the requirements for each state where you have employees working. A lawyer or another qualified individual can give you legal advice regarding this topic. 

Then, consider the number of employees you have, what fees are involved, and what other types of retirement plans are available for your company. Then you can use this information to decide which route to take.  

State-Sponsored Plans: The Pros and Cons

Let’s also look at where these plans shine and fall short to help you decide if it’s something you want to offer.

Pros 

  • Less legal responsibility: Enrolling your employees in a state-sponsored plan means you’re no longer legally responsible for how the money in the plan is managed or invested. If there’s ever a problem with how the money in the plan is managed, your employees would have to take legal action against the state, not you.
  • Low cost (or no cost): Traditional retirement plans require employers to pay fees for plan administration, record keeping, and investment management. But state-sponsored retirement plans often have low or no fees for employers. That’s a great perk for businesses on a shoestring budget. When you don't have to worry about high fees eating into your precious profits, you can reinvest that money back into your business.
  • Light on administrative requirements: Once you get your employees enrolled in the retirement plan, there are often very few administrative requirements. In most cases, you’ll only have to send up-to-date payroll data to ensure the right amount gets deducted each month. And, if you work with a payroll service, such as Hourly, these payroll deductions can be streamlined and automated, so there’s even less paperwork on your end. 
  • Can attract employees: As more and more employees understand the importance of saving for retirement, they’re going to be looking for these employee benefits when searching for a new job. Offering a state-sponsored plan is better than no retirement benefits at all, so it can help you attract workers. 

Cons 

  • Lack of flexibility: These plans are often one-size-fits-all. That means there's no flexibility in how you design the plan to meet the needs of your business and employees. Investment options are limited, and employees are all initially enrolled at the same level (though they can opt out or adjust this if they choose). 
  • Not able to offer a match: Many states don’t allow employers to make matching contributions. So, if you’re trying to attract top talent to your company, they may go with a business that matches a certain percentage instead. However, there are some exceptions. For instance, in Massachusetts, employers can make safe harbor contributions to each employee’s plan. These employer-funded deposits can’t be taken back later, which means employees can take them with them if they leave the company.
  • Employees may not understand their options: You’re required to automatically enroll all of your employees in the plan to start. While each employee has the right to opt-out, they may feel like they lack a say about their money. To avoid feelings of resentment or mistrust, you’ll need to let your team know what your state requires and what they can do to play a more active role in the retirement process. The state websites linked above often have pages marked for employees, which can be a starting point for this information. 
  • Strict rules and deadlines: Most states have strict rules about which businesses must offer the plan to their employees. And, they have firm deadlines for when you have to get started. If you miss a deadline or don't follow the rules, you could be penalized. This can be a hassle for small business owners who are already stretched thin. And it's one more thing you have to keep track of to avoid getting fined.

Stay in the Know about State-Sponsored Retirement Plans

State-sponsored retirement plans are becoming more and more common. If your state doesn't yet have one, it could just be a matter of time before you’re required to offer some type of retirement benefit to your employees. 

So, it's important to stay up to date on the latest changes and understand how they could impact your business. And if your state has already implemented one, be sure you follow the requirements to avoid paying stiff penalties or fees. 

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